Question

Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.34 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life. The project is estimated to generate $1,740,000 in annual sales, with costs of $650,000. The project requires an initial investment in net working capital of $310,000, and the fixed asset will have a market value of $270,000 at the end of the project.

a.	If the tax rate is 21 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.)
b.	If the required return is 10 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Years	Cash Flow
Year 0	-$2,650,000
Year 1	$1,024,900
Year 2	$1,024,900
Year 3	$1,548,200

Calculate of Annual Cash Flow

Annual Sales	$1,740,000
Less : Costs	$650,000
Less: Depreciation [$2,340,000 / 3 Years]	$780,000
Net Income Before Tax	$310,000
Less : Tax at 21%	$65,100
Net Income After Tax	$244,900
Add Back : Depreciation	$780,000
Annual Cash Flow	$1,024,900

Year 0 Cash outflow

Year 0 Cash outflow = Initial Investment + Working Capital

= -$2,340,000 - $310,000

= -$2,650,000

Year 1 Cash Flow = $1,024,900

Year 2 Cash Flow = $1,024,900

Year 3 Cash Flow

Year 3 Cash Flow = Annual cash flow + Working capital + After-tax market value

= $1,024,900 + $310,000 + [$270,000 x (1 – 0.21)]

= $1,024,900 + $310,000 + [$270,000 x 0.79]

= $1,024,900 + $310,000 + $213,300

= $1,548,200

Net Present Value (NPV) of the Project

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= [$1,024,900 / (1 + 0.10)¹] + [$1,024,900 / (1 + 0.10)²] + [$1,548,200 / (1 + 0.10)³] - $2,650,000

= [($1,024,900 / 1.10) + ($1,024,900 / 1.21) + ($1,548,200 / 1.331)] - $2,650,000

= [$9,31,727.27 + $8,47,024.79 + $11,63,185.57] - $2,650,000

= $29,41,937.64 - $2,650,000

= $291,937.64

“Hence, the Project’s Net Present Value (NPV) will be $291,937.64”